Valuations favor African REITs

When looking at valuations for African REITs, as tracked by the FTSE/JSE Africa Real Estate Index, earnings potential for African REITs (real estate investment trusts) has been rising at a decent pace (as indicated by the green line in the graph below) over the past 5 years.

Now, what makes the case for African REITs even stronger is the fact that valuations remain relatively low. The forward price-to-earnings multiple (as indicated by the white line in the graph below), has depicted a stable to declining trend over the past 5 years. So what we have here is rising earnings potential (Best EPS) at lower cost (Best P/E).

South African REITs have returned 8.3% YTD

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Within Africa (EZA) (GAF), South African REITs that are part of the Vanguard Global ex-US Real Estate ETF (VNQI) have returned 8.31% on average for the year (as of June 5). REITs such as Octodec Investments, Hospitality Property Fund, and Resilient REIT have returned 18.5%, 16.4%, and 14.6% respectively for the year. Octodec Investments is owned by the Wapnick family and has a market capitalization of about $125 billion. “What makes Octodec interesting is that it is very urban-focused, and it’s residential focused,” said Grant Gilburt from Nedbank Private Wealth over a CNBC Africa interview recently. Residential makes up about 30% of Octodec Investments, and Gilburt sees “a substantial need and demand for residential properties.”

Vukile Property Fund and Arrowhead Properties have demonstrated good month-to-date performance with 5.8% and 4.7% price return, respectively. Arrowhead Properties, with its 13.2% return, also boasts of 9.36% dividend yield and is currently trading at a relatively lower 8.25 times price to earnings.